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Trauma Insurance and Superannuation

Is Trauma Insurance available through superannuation?

Trauma Insurance is no longer available through superannuation following new legislation that became effective on July 1 of 2014. Other forms of insurance such as Life Cover, Any Occupation TPD and Income Protection are still available through superannuation.

If you would like to discuss your current cover or look for Trauma Insurance funded outside of superannuation, you can make a secure application with an insurance consultant in the form below. Trauma insurance can usually be purchased as a standalone policy or bundled with life cover to offer additional protection.

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Level of ProtectionCoverage is the amount of money that you will be paid in the event of a claim. An insurance consultant can help you determine an appropriate amount.Calculator

TPD CoverProvides a lump sum payment if you become totally and permanently disabled and are unable to return to work.

Trauma CoverProvides a lump sum payment if you suffer a serious medical condition. Cover can be taken out for 40-60 medical conditions depending on the policy you choose.

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How was Trauma insurance in superannuation treated before July 1 2014

Tax treatment of trauma insurance premiums inside of super

Unlike death, TPD and salary continuance cover, trauma insurance premiums were not tax-deductible when held inside super (to a superannuation trustee). The reason for this was further explained under ATO’s Interpretative Decision 2002/371 regulation:

Trauma insurance is not tax-deductible, unlike other life insurance policies under subsection 279 (1) of the Income Tax Assessment Act 1936 (ITAA 1936), because it does not meet the definition of a ‘death or disability benefit,’ as:

Trauma cover does not provide benefit in the event of death;

Nor does it designed to meet the criteria of a permanent disability, in which the policy can provide a benefit; and

It does not provide benefit in the form of an income, as trauma policy is designed to offer compensation when a specific medical condition occurs and not to replace lost income.

As a result, concessional (deductible) contributions to fund trauma cover premiums are taxed within the fund, which may result in higher premiums for cover held inside super compared to a policy outside super.

Source: Comminsure, 2010; OnePath, 2013

Was the benefit payment from trauma cover within super tax-deductible?

Trauma insurance proceeds that are paid into a super fund are generally not subject to tax inside the fund. However, when you receive the benefit payment from a super fund, it is taxable based on a number of different factors:

Your tax free and taxable components;

Your age, whether you are over 60, within a preservation age that are less than 60 years old, or under the preservation age;

The form that your benefit is paid in - for example, lump sum or pension; and

The event that triggers a claim for payment - for example, temporary or permanent incapacity, death or terminal illness.

When your trauma benefit is paid into your super fund, the payment is generally allocated to the taxable component. However, you may be eligible for an additional your tax-free component on the lump sum payment if you are suffering from a permanent disability. Although, this being said, if you have been diagnosed with a trauma condition, that does not necessarily mean you are permanently incapacitated by definition, thus will not automatically create a tax free component.

In comparison, when you own a trauma policy outside of superannuation, the proceeds are tax free when paid to you as the policy owner or a nominated relative.

Source: OnePath, 2013

What was the sole purpose test?

The sole purpose test restricts the provision of superannuation benefits to a range of retirement, or retirement related circumstances, although certain definitions within this rule may be quite broad.

In a legislative ruling under Self Managed Superannuation Funds Determination (SMSFD) 2010/1, it was stated that trauma insurance purchased through super fund does not breach the sole purpose test, as regulated under section 62 of the Superannuation Industry (Supervision) Act 1993, provided the following provisions are met:

The trauma benefit is required to paid to the SMSF trustee;

The benefit payment will be held in the SMSF until the policyholder or member satisfies a condition of release;

The trauma policy has not been taken out to provide benefit for other than SMSF member or to secure other benefits that may be available to the member or member’s relative.

Bear in mind that this rule only applies to trauma insurance policies within a self managed super fund. Further guidance are provided by APRA in the Superannuation Circular III.A.4 for superannuation fund trustees to determine whether or not holding trauma cover inside the fund is acceptable and whether they are able to substantiate their reasons for doing so if they are to be challenged by an auditor or APRA.

Source: APRA, 2001; Brookhouse, 2010; Comminsure, 2010; OnePath, 2013

How were trauma insurance benefits claimed through super?

To receive your trauma insurance benefit paid to a super fund, you must satisfy a condition of release, which include one of the following:

Retirement after preservation age;

Transition to retirement; or

Reaching 65 years of age.

You may be able to access your super prior to your retirement if you are experiencing one of the following events:

Severe financial hardship - To be eligible, you must be on income support continuously for 26 weeks and are unable to meet immediate living expenses of the family.

Temporary incapacity - You may be eligible to gain early access to your super if you are temporarily disabled, as a result of physical or mental ailments, and are unable to work. The benefits will only be paid on a monthly basis.

Permanent incapacity - If you are permanently disabled and you are unlikely to be in a gainful employment, in which you are reasonably qualified for by education, training or experience, you may be eligible to receive all your super benefits. Your condition must be verified by two medical professionals.

Death - Your nominated beneficiaries are able to access your super balance in the event of your death.

It is important to understand that suffering a trauma condition does not necessarily translate to a condition of release. Immediate access to trauma benefit that are being held in a super environment, without satisfying a condition of release mentioned above, is a breach of the sole purpose test and 46.5% tax may applicable to the assets in the fund.

Source: Comminsure, 2010; ATO, 2012

When did trauma inside super get phased out?

Under the Super System Review released in 2010, a recommendation was put forward to ban trauma insurance operating inside a superannuation environment and any existing policies should be phased out.

This recommendation has since then been passed into law and started from 1 July 2014. Trauma insurance is no longer available to new members. An exemption to this rule is applicable to existing insurance arrangements that have been taken out prior to 1 July 2014. A lapse in cover or rollover to a different super fund, however, may result in losing the exemption.

Source: Comminsure, 2010; Super System Review, 2010; OnePath, 2013

What if I joined my superannuation fund before July 1 2014?

You may be exempt from the changes and still entitled to trauma cover through your super fund. If you have rolled over your cover or your fund has been updated, you may lose the exemption. Check with your existing insurer if you're unsure.

Should I consider taking Trauma Insurance outside of superannuation?

To get the most out of your cover, you may want to consider trauma insurance outside a superannuation environment. If you still have a trauma plan held within superannuation, it may more affordable. However, having cover outside super allows you to access your trauma benefit much more easily and in a prompt manner.

With a lot less stringent rules and regulation to its superannuation counterpart, you will receive your benefit immediately upon a diagnosis of a medical condition that is covered in your trauma policy and cover your immediate financial obligations. On top of that, the lump sum benefit you receive with trauma cover will also be tax free.

Prefer to talk?

Will is a personal finance writer for finder.com.au specialising in content on insurance. While he cannot give personal advice to clients, Will enjoys explaining the intricacies of different types of protective cover to help individuals and businesses find affordable cover that won't leave them underinsured.

Find out how you can fund your income protection insurance premiums through a self managed super fund and learn the benefits and disadvantages of this option. Receive assistance in taking out cover through super with an experienced insurance consultant.

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